The bank's leadership role in underwriting risky CDOs brought in millions in fees but put it in the subprime bull's-eyeThe blast of criticism directed at Citigroup (C) Chief Executive Officer Charles O. Prince III, whose stewardship of the nation's biggest bank has drawn barbs, has been withering in recent weeks. Yet Prince may have caught a huge break, courtesy of Merrill Lynch CEO E. Stanley O'Neal. On Oct. 24, O'Neal's firm officially became Wall Street's biggest loser in the subprime game.
Merrill's stunning $7.9 billion third-quarter writedown—the result of a sharp drop in the value of securities backed by risky home loans—is the most painful hit taken by a Wall Street bank during the subprime housing blowout. Even worse, the size of the writedown is nearly $3 billion more than Merrill had forecast on Oct. 5. The charge is an embarrassment for O'Neal and Merrill (MER), which reported its first quarterly loss in six years on Oct. 24, and stems from Merrill's big push into collateralized debt obligations—securities backed by subprime mortgages that are sold to investors based on their risk appetite.
Merrill took a leadership role in underwriting CDOs in 2006 and 2007, when subprime mortgage lenders all but threw lending standards out the window. Over that period, Merrill was lead underwriter on 136 CDO deals with a dollar value of $93 billion, according to Thomson Financial (TOC). Merrill executives may not have realized then just how reckless things had gotten in the subprime mortgage world. They do now. "We made a mistake," O'Neal said in a conference call with analysts. "Some errors of judgment were made in the business itself and within the risk management function."
Read More
